Morguard North American Residential REIT Announces 2017 Third Quarter Results and an Increase to Monthly Cash Distributions

MISSISSAUGA, ON, Oct. 31, 2017 /CNW/ – Morguard North American Residential REIT (the “REIT”) (TSX: MRG.UN) today announced its financial results for the three and nine months ended September 30, 2017.

Third Quarter Highlights

The Board of Trustees has approved an increase to the REIT’s annual cash distribution by $0.02 per Unit (3.1%). The increase is expected to be effective for the November 2017 distribution, payable on December 15, 2017 to unitholders of record as at November 30, 2017. This will bring the distributions to $0.66 per Unit on an annualized basis from the current level of $0.64 per Unit.

On July 6, 2017, the REIT acquired a property comprising 104 suites and approximately 33,000 square feet of commercial area located in Falls Church, Virginia, for a purchase price of $56.5 million (US$43.7 million), including closing costs.

On July 10, 2017, the REIT acquired a property comprising 515 suites and approximately 20,000 square feet of commercial area located in Chicago, Illinois, for a purchase price of $292.7 million (US$227.1 million), including closing costs. The acquisition was partially financed by a new mortgage in the amount of $157.9 million (US$122.5 million) at an interest rate of 3.49% for a term of eight years. On October 2, 2017, the REIT sold a 49% interest in the property to an institutional partner for $63.5 million (US$50.8 million).

On July 12, 2017, the REIT sold four U.S. properties located in Mobile, Alabama, comprising 1,329 suites, for net proceeds of $88.7 million (US$69.3 million).

On August 17, 2017, the REIT acquired a 50% interest in a property comprising 492 suites located in Rockville, Maryland, in which the REIT had a net investment of $40.1 million (US$31.7 million).

The REIT is reporting third quarter performance of:

Net operating income (“NOI”) of $35.2 million for the three months ended September 30, 2017, an increase of $2.2 million, or 6.6% compared to 2016.

Proportionate share net operating income (“Proportionate NOI”) of $30.6 million for the three months ended September 30, 2017, an increase of $2.1 million, or 7.5% compared to 2016.

Net income of $7.9 million for the three months ended September 30, 2017, compared to a net income of $26.2 million for the three months ended September 30, 2016. The decrease was largely attributable to a decrease in fair value gain on income producing properties and deferred income taxes.

Basic funds from operations (“FFO”) of $14.5 million for the three months ended September 30, 2017, a decrease of $0.4 million, or 2.6% over the same period in 2016.

Basic FFO of $0.29 per Unit for the three months ended September 30, 2017, a 9.4% decrease as compared to the $0.32 per Unit for the third quarter of 2016.

FFO payout ratio for the three months ended September 30, 2017 of 56.2%.

Financial and Operational Highlights

As at

September 30,

December 31,

September 30,

(In thousands of dollars, except as noted otherwise)

2017

2016

2016

Operational Information

Number of properties

46

46

46

Total suites

13,314

13,472

13,472

Occupancy percentage

94.1%

95.2%

95.5%

Average monthly rent – Canada (in actual dollars)

$1,320

$1,296

$1,289

Average monthly rent – U.S. (in actual U.S. dollars)

US$1,308

US$1,038

US$1,031

Summary of Financial Information

Gross book value

$2,575,375

$2,285,727

$2,222,272

Indebtedness

$1,403,950

$1,237,613

$1,226,543

Indebtedness to gross book value ratio

55%

54%

55%

Weighted average mortgage interest rate

3.5%

3.6%

3.6%

Weighted average term to maturity on mortgages payable (years)

6.2

5.7

5.9

Exchange rates – United States dollar to Canadian dollar

$1.25

$1.34

$1.31

Three months endedSeptember 30

Nine months endedSeptember 30

(In thousands of dollars, except per Unit amounts)

2017

2016

2017

2016

Summary of Financial Information

Interest coverage ratio

2.12

2.05

2.25

2.01

Indebtedness coverage ratio

1.52

1.39

1.56

1.37

Revenue from income producing properties

$56,787

$55,095

$169,609

$163,035

NOI

$35,202

$33,009

$87,284

$81,269

Proportionate NOI

$30,641

$28,508

$89,699

$83,802

Same Property Proportionate NOI

$27,220

$26,880

$79,891

$76,838

NOI margin – IFRS

62.0%

59.9%

51.5%

49.8%

NOI margin – Proportionate

54.5%

53.0%

53.9%

52.6%

Net income

$7,907

$26,173

$71,932

$7,758

FFO – basic

$14,489

$14,871

$46,071

$42,781

FFO – diluted

$15,192

$15,574

$48,158

$44,874

FFO per Unit – basic

$0.29

$0.32

$0.91

$0.92

FFO per Unit – diluted

$0.28

$0.31

$0.88

$0.89

Distributions per Unit

$0.16

$0.15

$0.48

$0.45

FFO payout ratio

56.2%

46.9%

52.9%

48.9%

Weighted average number of Units outstanding (in thousands):

Basic

50,900

46,504

50,766

46,510

Diluted

54,771

50,375

54,637

50,381

Average exchange rates – United States dollar to Canadian dollar

$1.25

$1.30

$1.31

$1.32

Net Income

Net income of $7.9 million for the three months ended September 30, 2017, decreased by $18.3 million, compared to net income of $26.2 million for the three months ended September 30, 2016. The decrease in net income was primarily due to the following:

An increase in net operating income of $2.2 million;

An increase in interest expense of $1.7 million, primarily due to a decrease in non-cash items included in interest expense;

An increase in trust expenses of $0.1 million;

An equity loss from investment of $1.5 million, primarily due to fair value loss attributable to acquisition costs;

A decrease in net fair value gain on income producing properties of $20.5 million;

An increase in fair value loss on Class B LP Units of $2.2 million; and

A decrease in income taxes (current and deferred) of $7.6 million.

Net Operating Income

Three months ended September 30, 2017 and 2016For the three months ended September 30, 2017, NOI from the REIT’s properties increased by $2.2 million (or 6.6%) to $35.2 million, compared to $33.0 million in 2016. The increase in NOI is due to an increase from acquisitions net of the disposal of properties of $1.8 million and an increase in Same Property NOI of $0.4 million (or 1.4%). The Same Property increase of $0.4 million is due to an increase in Canada of $1.3 million (or 11.4%), a decrease in the U.S. of US$0.04 million (or 0.3%) and the change in foreign exchange rate which decreased NOI by $0.8 million.

For the three months ended September 30, 2017, Proportionate NOI from the REIT’s properties increased by $2.1 million (or 7.5%) to $30.6 million, compared to $28.5 million in 2016. The increase in Proportionate NOI is due to an increase from acquisitions net of the disposal of properties of $1.8 million and an increase in Same Property Proportionate NOI of $0.3 million (or 1.3%). The Same Property increase of $0.3 million is due to an increase in Canada of $1.2 million (or 11.3%), a decrease in the U.S. of US$0.3 million (or 2.2%) and the change in foreign exchange rate which decreased Proportionate NOI by $0.6 million.

Nine months ended September 30, 2017 and 2016For the nine months ended September 30, 2017, NOI from the REIT’s properties increased by $6.0 million (or 7.4%) to $87.3 million, compared to $81.3 million in 2016. The increase in NOI is due to an increase from acquisitions net of the disposal of properties of $2.8 million and an increase in Same Property NOI of $3.2 million (or 4.2%). The Same Property increase of $3.2 million is due to an increase in Canada of $2.4 million (or 7.7%) and an increase in the U.S. of US$0.8 million (or 2.4%).

For the nine months ended September 30, 2017, Proportionate NOI from the REIT’s properties increased by $5.9 million (or 7.0%) to $89.7 million, compared to $83.8 million in 2016. The increase in Proportionate NOI is due to an increase from acquisitions net of the disposal of properties of $2.8 million and an increase in Same Property Proportionate NOI of $3.1 million (or 4.0%). The Same Property increase of $3.1 million is due to an increase in Canada of $2.3 million (or 7.6%), an increase in the U.S. of US$1.0 million (or 2.8%) and the change in foreign exchange rate which decreased Proportionate NOI by $0.2 million.

Funds from Operations

Basic FFO for the three months ended September 30, 2017, decreased by $0.4 million, or 2.6%, to $14.5 million ($0.29 per Unit), compared to $14.9 million ($0.32 per Unit) in 2016. The decrease is mainly due to increase in interest expense of $1.4 million (excluding distributions on Class B LP Units and fair value adjustments), an increase in other expenses of $0.8 million and increase in trust expenses of $0.1 million, partially offset by higher Proportionate NOI of $2.1 million.

Basic FFO per Unit for the three months ended September 30, 2017, decreased by $0.03 to $0.29 per Unit, compared to $0.32 per Unit due to the following non-recurring factors:

i)

the change in the foreign exchange rate had a $0.01 per Unit negative impact;

ii)

a decrease in U.S. Same Property Proportionate NOI due to higher than normal vacancy;

iii)

the Downsview Acquisition currently under lease-up has not yet contributed to stabilized NOI;

iv)

the recent U.S. acquisitions (net of disposals) full period impact on its net contribution to NOI; and

v)

during transition of management of the recent U.S. acquisitions certain initial operational challenges that management had to overcome for which the stabilization of NOI is not yet fully reflected in the current period.

Basic FFO for the nine months ended September 30, 2017, increased by $3.3 million, or 7.7%, to $46.1 million ($0.91 per Unit), compared to $42.8 million ($0.92 per Unit) in 2016. The increase is mainly due to higher Proportionate NOI of $5.9 million, partially offset by an increase in interest expense of $1.0 million (excluding distributions on Class B LP Units and fair value adjustments), an increase in trust expenses of $0.7 million and an increase in other expenses of $0.6 million.

The REIT’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2017, along with the Management’s Discussion and Analysis will be available on the REIT’s website at www.morguard.com and will be filed with SEDAR at www.sedar.com.

Distribution Increase

The Board of Trustees has approved an increase to its monthly cash distributions to $0.055 per Unit, representing $0.66 per Unit on an annualized basis. The increase is expected to be effective for the November 2017 distribution, payable on December 15, 2017 to unitholders of record as at November 30, 2017 and represents an approximate 3.1% increase from the REIT’s current $0.64 per Unit annualized distribution.

Non-IFRS Measures

The REIT’s condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). The following measures, NOI, Proportionate NOI, Same Property NOI, Same Property Proportionate NOI, FFO, indebtedness, gross book value, indebtedness to gross book value ratio, interest coverage ratio and indebtedness coverage ratio (collectively, the “non-IFRS measures”) as well as other measures discussed elsewhere in this press release, do not have a standardized definition prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers. The REIT uses these measures to better assess the REIT’s underlying performance and financial position and provides these additional measures so that investors may do the same. Details on non-IFRS measures are set out in the REIT’s Management’s Discussion and Analysis for the three and nine months ended September 30, 2017 and available on the REIT’s profile on SEDAR at www.sedar.com.

Conference Call Details

Morguard North American Residential Real Estate Investment Trust will hold a conference call on Thursday, November 2, 2017at 3:00 p.m. (ET) to discuss the financial results for the three and nine months ended September 30, 2017 and 2016. To participate in the conference call, please dial 647-427-7450 or 1-888-231-8191. Please quote conference ID # 93185516.

About Morguard North American Residential REIT

The REIT is an unincorporated, open-ended real estate investment trust established under and governed by the laws of the Province of Ontario. The Units of the REIT trade on the Toronto Stock Exchange under the ticker symbol MRG.UN. With a strategic focus on the acquisition of high-quality multi-suite residential properties in Canada and the United States, the REIT maximizes long-term Unit value through active asset and property management. Its portfolio consists of 13,314 residential suites (as of October 31, 2017) located in Alberta, Ontario, Colorado, Texas, Louisiana, Illinois, Georgia, Florida, North Carolina, Virginia and Maryland with an appraised value of approximately $2.5 billion at September 30, 2017. For more information, visit the REIT’s website at www.morguard.com.